(Editor's note: This select print feature originally appeared in the January issue of DS News magazine)
With a trailblazing real estate mogul entering the Oval Office on January 20, a sharper focus on the U.S. housing delivery system is possible, if not likely. Understandably, housing finance issues received far less attention, if any, than other issues on the tops of minds of voters. However, housing remains a key driver of domestic economic vitality and a focus on housing as a national priority remains crucial.
According to the Federal Reserve Second Quarter 2016 Flow of Funds report, the total value of the U.S housing market is $23.5 trillion, comprised of $10.1 trillion in mortgage debt and $13.40 trillion in household equity. Although the numbers are massive, the fact is that the housing finance system has remained in near “crisis mode” for far too long.
The broader economy is in modest recovery and the housing market is on firmer footing compared to the period surrounding the presidential transition of 2008, however many significant challenges still face the mortgage market and the delivery of housing (product).
The desire to become a homeowner has not waned, but policies enacted over the past few years have made that dream unreachable for many. In spite of historically low mortgage rates, ranging from approximately 5 percent in January of 2009 to less than 4 percent today, and the spectrum of government programs the Administration established in response to the housing crisis, including the highly-publicized Making Home Affordable and Neighborhood Stabilization programs, the homeownership rate fell to 63.5 percent in the third quarter of FY 2016, maintaining a dismal five-decade low.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), designed to rein in financial institutions after the housing collapse has touched every part of the mortgage lending industry, and resulted in a long-term contraction in credit availability. Close to 50 regulatory reforms emanating from Dodd-Frank have focused on the mortgage industry alone. The proposed rules and subsequent regulations cover a wide array of the mortgage lending processes including: the ability to repay, risk retention, escrows, disclosures, homeownership counseling, servicing, appraisals, and loan originator compensation. Additionally, specified capital and liquidity requirements and stress testing has driven corporations like General Electric to sell off its GE Capital real estate financing arm.
Excessive enforcement actions, coupled with state and federal regulatory reforms, have discouraged mortgage lenders from making any loans that fall outside of the strict boundaries set by CFPB regulations. In the end, prospective homebuyers, including many who are first-time buyers with perhaps a blemish or two on their credit score, are largely shut out of the mortgage market from this stifling of housing credit.
Lenders have also been exposed to increased scrutiny under an obscure 150-year-old law, the False Claims Act (FCA). Between January 2009 and the end of FY 2015, financial institutions paid an unprecedented $5 billion into the federal coffers in connection with settlements relating to federally backed mortgages. Adding the $25 billion National Mortgage Settlement of 2012, the $100 billion lender buyback of “defective” mortgages from the government sponsored enterprises (GSEs) in 2010, and the 2011 commencement of the Consumer Financial Protection Bureau (CFPB), mortgage lending got a lot more risky, and a lot less attractive. Compliance costs, such as staff, training, and compliance systems updates associated with the increased regulatory burden imposed by Dodd-Frank have nearly doubled the cost to originate a loan over the last 10 years. These higher costs have disproportionately impacted smaller mortgage lenders.
Understandably, the industry remains hyper-focused on originating low risk loans with a difficult to achieve goal of zero underwriting defects. Despite the proliferation of regulations and measures intended to improve the mortgage market with consumer safeguards, the housing market recovery remains sluggish, and too many American workers continue to lose access to the wealth-accumulating tool of homeownership.
While I admire the efforts of the current Administration to prevent a complete housing collapse, in particular expansion of the HAMP program, the policies of the last eight years have resulted in historically low homeownership rates, plummeting middle-class wealth, higher rents, and limited access to mortgage credit. Collectively, these policies have left homeownership out of reach for too many Americans and have triggered increased pressure on rents and the rental housing supply.
The press and Washington D.C. insiders often limit the concept of housing finance reform to GSE reform, but the needed for change extends far beyond that. A well-functioning housing sector is essential to a strong economy and the security of families and individuals including senior citizens and persons with disabilities.
To restore housing to its traditional role as an engine of economic growth and opportunity, the incoming Trump Administration should pursue policies designed to make the path to homeownership possible again for fully-informed prospective buyers who have the ability to carry a mortgage. Furthermore, despite the addition of millions of previously-owned single family homes to the rental stock and an increase in multifamily development, the apartment supply is not even close to meeting the demand.
Rental housing faces obstacles of rising rents layered on stagnant household incomes; construction debt not serviceable with “affordable” rents, and the 10 percent increase of affordable rental units being quickly overwhelmed by the 40 percent rise in the number of low-income renters competing for those units.
Having served as Federal Housing Commissioner from 2005-2009 including six months into the Obama Administration as a hold-over appointee, I understand the difficulties entailed in shifting the sails to change a decades-old agency’s operational direction. I am encouraged that a real estate developer turned President-elect will take the opportunity to carefully examine and assess the housing finance system, and maybe also review the impact, or lack thereof, that the roughly $150+ billion in federal community development funding has had on inner cities and infrastructure.
The contentious and dramatic election is over, it is time to settle down, and as President Franklin Roosevelt said on the eve of his re-election in 1936, “we will keep our sleeves rolled up.” I am hopeful the incoming Trump Administration and a new Congress will work together and take action to expand the path to sustainable homeownership, increase the supply of rental units for Americans with limited means, and continue the recent progress toward ending homelessness, especially for veterans. I have hope, and look forward to seeing a prominent developer, now President-elect, bring the U.S. residential real estate market out of its stupor, all part of making America’s housing great again, for everyone.
 Federal Reserve, Flow of Funds Q2 2016 and Urban Institute Housing Finance Policy Center Monthly Chartbook, October 2016.
 U.S. Census Bureau, Quarterly Residential Vacancies and Homeownership Third Quarter 2016, October 2016
 U.S. Department of Justice, Office of Public Affairs, December 2015.
 Joint Center for Housing Studies at Harvard University, The State of the Nation’s Housing 2015, June 2015.